A review and interpretation of current happenings in the world of economics and finance

Thursday, May 5, 2011

Time For Policymakers To Change Economic Models--Got That Portugal?

Government policymakers just don’t seem to get it!

The economic philosophy governments have been using as the foundation of their budget and monetary policy since World War II isn’t working.Governments need to change direction.

Most governments in the developed world need to do a “turnaround.”But, turnarounds are only successful when the organizational model is changed.Often this change requires a new management team.

For the past fifty or so years, the governmental leadership in most countries in the developed world have assumed, basically, the same economic philosophy.And, as in the American case, both political parties have assumed the same fundamental economic model.

This economic model got us to where we are, and, as in the case of most turnaround situations, the old model must be re-placed before the turnaround can be achieved.

The financial markets understand this!

The governments involved don’t seem to get it…yet!

We have several “case studies” going at this time.These “case studies” are called Ireland; Greece: and Portugal.

Of course, the initial response of these governments when financial markets began to become skeptical of their performance was…the market behavior was driven by speculators…it is not our fault.

The next response was the attempt to bail out these countries.And, what does a bailout achieve?A bailout “buys” time with the assumption that given time these governments will be able to get through this period of turmoil.

Not once do we hear of the possibility that these governments might be operating with a philosophy of government that doesn’t work!

And, the financial markets don’t respond positively to these efforts.The leaders of these governments shrug their shoulders, get a puzzled look on their faces, and ask why the financial markets continue to punish them and their people.

Portugal, you still are living off the same model.You have not really altered anything!

And, this dance has been going on since the beginning of 2010.Yet, no one seems to think that they need to do anything differently.

Is Spain next?

That, of course, is the question that everyone is asking.And, some analysts are saying that Spain has gotten the message.

The question is…has Spain really gotten the message?

If not, then, who is next?

As I wrote yesterday and the day before…some things have changed.The world is in a period of transition.The next fifty years is going to be remarkably unlike the past fifty years.

Assumptions are going to have to change.Leaders are going to have to adopt new models and new philosophies.And, as we are seeing, the transition is not going to be easy.

The ultimate question relates to the United States…when, along the chain of dominoes, is its turn?

A major problem of the transition will be the speed at which it can occur.

When a company gets into serious problems, a turnaround specialist can be brought in to change the operating model of the company, enforce discipline, and execute the new plan.The new leader has substantial authority to make these changes.

The owners, the shareholders, give the turnaround specialist the authority to make the changes needed.And, the changes are imposed, not on the owners, but on the employees of the company.

In democratic governments, executing such a turnaround is not as feasible because the people that do the voting are the people that will bear the brunt of the changes. It is hard for people to vote in favor of their own pain.

So, the transition will not be over until it is over.The future of the governments in the developed world will probably be very much like the last sixteen months have been.Band aids in order to keep things afloat…but a failure to really get to the heart of the problem.We will continue to try and “muddle through.”

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About Me

Professional history:
Banking--President and CEO of two publically traded financial institutions; Executive Vice President and CFO of another.
Academic--Professor at Penn State University and at the Finance Department, Wharton School, University of Pennsylvania.
Government--Special Assistant to Secretary George Romney at Department of Housing and Urban Development; Senior Economist in Federal Reserve System.
Entrepreneurial--work in venture capital and other private equity; work with young entrepreneurs in urban environment.